Holger Bartel - Global Chief Executive Officer Glen Ceremony - Chief Financial Officer and Corporate Secretary.

Edward Woo - Ascendiant Capital Markets, LLC Daniel Kurnos - The Benchmark Company.

Good morning, everyone, and welcome to the Travelzoo Fourth Quarter 2017 Financial Results Conference Call. At this time, all participants have been place in a listen-only mode and the floor will be open for questions following the presentation. Today’s call is being recorded.

Before introducing you to your host and beginning the Company's presentation, the Company would like to remind you that all statements made during this conference call and presented in the Company's slides that are not statements of historical fact constitute forward-looking statements and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Actual results could vary materially from those contained in the forward-looking statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are described in the Company's Forms 10-K and 10-Q and other periodic filings with the SEC.

Unless required by law, the Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Please note that this call is being webcast from the Company's Investor Relations website at www.travelzoo.com/earnings.

Please refer to the Company's website for important information, including the Company's earnings press release issued earlier this morning, along with the slides that accompany today's prepared remarks.

An archived recording of this conference call will be available on the Travelzoo Investor Relations website at www.travelzoo.com/ir, beginning approximately 90 minutes after the conclusion of this call. Now it is my pleasure to turn the floor over to your host, Holger Bartel, Travelzoo's Global CEO. Sir, you may begin..

Thank you. Good morning, everyone, and thank you for joining us today for Travelzoo's fourth quarter 2017 financial results conference call. I am Holger Bartel, the Global CEO of Travelzoo, and as always with me today, is Glen Ceremony, the Company's Chief Financial Officer. Glen will walk you through today's format..

Thank you, Holger, and everyone, for joining us today. For the format of today's call, I will review our fourth quarter financial results, and then Holger will provide an update on our business initiatives. Thereafter, we will open the call for our question-and-answer session.

Now please open our management presentation, which is available on our Investor Relations website to follow along with our prepared remarks. Now let's turn to Slide 3, which provides the key financial highlights for the quarter.

Our revenue for the quarter return to growth and was $27 million, up 1% year-over-year in nominal terms it was 2% lower if we apply constant currencies. Our diluted earnings per share from continuing operations this quarter was $0.05, slightly lower year-over-year, driven by the impact of our investments in Asia Pacific.

Our members remain stable at 29.4 million and our social media followers and mobile app downloads continue to increase. Slide 4 highlights our revenue by segment. Revenue in North America was $16.2 million, representing a year-over-year increase of 2% or 1% on a constant currency basis.

Revenue in Europe was $8.8 million, representing a year-over-year increase of 4% or a constant currency decrease of 4%. Revenue in Asia Pacific was $2 million, representing a year-over-year constant currency decrease of 19%. The next few slides cover further detail of our revenue for each of our three segments.

Slide 5 shows North America year-over-year revenue was $16.2 million. Revenues from our core products increased year-over-year due to increasing activities from our advertisers and partners. Revenues from our local products were up for the first time in the last several years due to better execution. Turning to Slide 6. Europe revenue was $8.8 million.

Revenue from our core products grew and the FX impact was positive. Both of which were offset was lower revenue due to us temporarily smaller sales team. On Slide 7, Asia Pacific revenue was $2 million which is lower than the prior year period due to recent management turnover and loss revenue from a large bankrupt customer in Japan.

Slide 8, provides the breakdown of our operating income. Our overall operating income was $1.1 million. North America generated profitability of $1.9 million, while Europe generated $800,000 of profit. This combined operating income of $2.7 million was largely offset by Asia Pacific operating loss of $1.6 million.

Income taxes were $466,000 which includes the estimated impact of the new U.S. tax law changes and the resolution of an IRS audit. As a reminder, our income taxes reflect the taxes on North America and Europe income without any offsetting tax benefit from the separate tax jurisdiction Asia Pacific losses.

Going forward, our earnings in 2018 are expected to benefit from the new reduced U.S. federal tax rate, as our U.S. profits represents the largest portion of the Company's taxable income, we are likely to see a significant positive impact on 2018 EPS. Slide 9 shows the cost of revenue and operating margin.

The cost of revenue as a percent of revenue increased over half a point to approximately 12.8% due to our focus on member satisfaction as a tool for member retention. The operating margin decreased due to the continued investments in Asia. Slide 10 presents our operating expenses by segment.

North America expenses increased due to the investment in marketing and some selected headcount related costs. Europe expenses were flat, while Asia cost increased slightly due to a selected product development and headcount related costs. Slide 11 shows that our productivity was up year-over-year with headcount relatively flat. Moving on to Slide 12.

DSO improved and operating cash flow was positive which allowed us to exit the quarter with a solid cash position of $22.6 million of which $16.4 million was held outside the U.S. Turning to Slide 13. In summary, the financial performance improved in North America and Europe, particularly in our core travel products.

However, we are still working with the management team in Asia Pacific to generate revenue growth. Even with the Asia investment, we maintained our overall profitability. Without APAC, our earnings in Europe and North America would have amounted to $0.17 a share in Q4, 2017.

In addition, we generated positive cash flow of $4 million and have maintained a solid cash position. Looking forward, we expect the following.

For our first quarter of 2018, we expect similar year-over-year changes in revenue as we have experienced over the last few quarters with a focus on increasing our revenue from expanded offerings in our travel products and better performance in Asia Pacific.

We are planning to maintain the increased member acquisition and member marketing spend and we plan to maintain our investments in Asia Pacific. We expect an additional $400,000 of expenses during the quarter compared to Q4 for certain non-recurring expenses.

In summary, given these trends and investments, we expect stable revenues year-over-year in Q1 and Q2 with an acceleration of growth towards the second half of 2018. We still expect lower operating income year-over-year in the next quarter due to the investments in Asia Pacific.

Holger will update you on various initiatives underway to drive purchases and bookings by our members in the next six to nine months. We continue to take steps to control non-investment area costs and are focused on increasing our productivity.

We believe that our focus our global Travelzoo brand, our removal of unprofitable business activities, our focus on our members in the way we engage with them through our enhanced website and apps, our expanded offerings in the areas of hotels, vacations, local businesses as well as our continued investments in our member acquisition while all collectively work to help position us for future growth in the global travel industry we operate in, which has positive long-term growth prospects.

So this concludes the financial summary of our fourth quarter of 2017. Now Holger will provide you an update on Travelzoo's business initiatives aimed to drive growth..

I am pleased that our revenue trends improved across the board in Q4 in all regions. And I am particularly happy that we can report today that our North America business after four years of declines has finally returned to growth both in travel and in our local products. We also had positive results in other markets.

For example in the UK and Australia, even though they remains a great deal of work to do across all of Asia Pacific. We also seek to improve profitability this year, in addition to maintaining and then even strengthening revenue growth throughout 2018.

On Slide 15, I would like to talk about some of the business initiatives that are under way, which should help us maintain and improve growth towards the second half of 2018. First, we're expanding our offerings being a Travelzoo member is great, but we want to make Travelzoo membership even more attractive.

So we are working to add exclusive benefits and member perks. We’re also increasing the number of exclusive offers as we find them to drive, sealed and bookings. We are looking to accelerate the pace of growth of our hotel platform. So we are adding more exclusive rates and offers, which we have found to increase conversion rates.

We also have started to break down the country silos, in which are offers reside today, and hotel platform for deals and special offers, our members is now fully globalized. We have been working on several initiatives to broaden our offering in the area of packaged vacations with more exclusive offers for our members.

We expect these beginning with the second quarter to provide a larger number of more relevant offers for our members. These partnerships are already underway, but we also looking into investments into other companies or possibly acquisitions. On the product side, we are making it simpler for our hotel partners to create deals for our members.

We have developed personalized alert services, so we can inform those members who are particularly interested in a specific destination or type of the occasion and we have begun to implement a technology platform, which will create a more personalized board of experience for our members and allow us to reach them beyond our traditional email format, for example on social media.

We have already started to see benefits of this platform in the area of new member acquisition. In marketing, we will create more visibility for the travels of brand in 2018 and better and more actively communicate the benefits of Travelzoo membership to both existing as well as prospective members.

We plan to implement a number of partnerships in various countries throughout 2018 with the aim to acquire high-quality new members at lower costs and we also increasing our marketing staff across most of our markets.

All these activities will not change financial performance immediately, but we believe we can maintain stable revenues at the beginning of the year and then accelerate revenue growth in the second half of the year. It should create a solid footing to grow earnings over the mid and longer-term.

To summarize again with Slide 16, as we maintain quality leadership, we are aiming to increase the number of exclusive offers for all members that are the able in demand and all goal is to accelerate topline growth but in a smart way some investments are needed but we would like to maintain profitability. This concludes our prepared remarks.

So now back to the operator..

Thank you. The floor is now open for questions. [Operator Instructions] Our first question comes from Ed Woo of Ascendiant Capital. Your line is now open..

Yes. Thank you for taking my question, and congratulations on the quarter.

I was wondering was there any industry impact during the quarter good or bad from either weather or looking or anything? Or was it just a pretty staggard quarter? What are you seeing in the overall travel industry?.

Hi, Ed. I think there was really nothing specific that we can point out. I think in Europe, we’re still dealing with the travel patterns they have talked about over the last few quarters that affected particularly markets like Germany.

Germany is probably the one where we hit some challenges in Q4 because there was a bankruptcy of Air Berlin, the second largest airline. There were some other trends in Germany that just made it a bit difficult over there. But overall the trends in North America, Asia Pacific, and Europe are very similar to previous quarters..

We have the Olympics – winter Olympics coming up.

Is it going to have any impact at all?.

We haven’t seen – I would say South Korea is not specifically a destination that we promote very strongly. It's very far away from North America and Europe where most of our members are.

And our business is mostly deals and you can imagine destinations that have big events on our destinations, where you find a lot of deals, so it's probably something that impacts other travel companies more than us..

Okay.

And then last one I have is have you seen any impact from I guess hotels, suppliers directly trying to sell directly to consumers? Has that had any impact on your hotel bookings?.

I think again this affects more the OTAs of the world Expedia, Priceline, Booking.com they are probably much more affected by that. We have actually not seen any impact on our business..

Great. Well, thank you and good luck..

Thanks Ed..

Thank you. Our next question comes from Dan Kurnos of The Benchmark Company. Your line is now open..

Hi, good morning. So let me ask Ed’s questions, same question a different way. We know that Priceline and Expedia have kind of turned the canons at each other right now in an effort to add inventory or supply at a pretty aggressive rate.

I know that you're a little bit more focused on the vacation package side and there's probably a lot of opportunity being a smaller player there to get involved, but as you kind of talked about Holger trying to add more exclusive offers or deals.

How much is the change in the marketplace in a way that people are trying to acquire inventory in the fact that guys seem to be bidding up to acquire that inventory or particular unique deals impacting your business model, number one? And number two, as you look to acquire more users which is something that you've been talking about for quite some time now.

How are you seeing understanding that you have a different subset of users? How are you seeing ROI in the marketplace particularly in pay channels, develop or evolve? Or are you leaning a little bit more heavily on social as you mentioned in order to try to push some of the more that the cheaper channels?.

Well, look Dan we are not an OTA, so we're not in the same shoes as Expedia or Priceline that aim to provide as much hotel inventory as we can. What makes our company different is the relationship that we have with our members. Our members continue to tell us that they love the brand, they trust us. Trust is actually very important.

So what we are doing in the hotel area is not to aim to provide our members with the biggest variety and biggest amount of - largest amount of hotels available, but actually recommend them places where they can expect to have a wonderful stay. So that makes us different. Hotels appreciate that.

The hotels actually would like to stick their neck out of this sea of commoditization of hotel offers. And then on the marketing front, as I said, we are looking in 2018 to do more marketing partnership. There are a lot of friends who have started to approach us to do co-promotions, co-marketing.

I think that’s going to be a great way to acquire new members in a more effective and better way then some of the online marketing that we’ve run over the last few years. So it’s something we are going to try. We have seen some early good results from that and I think that will help us to grow this member base in 2018..

Maybe just to be clear Holger on my first question, I just meant more – I know you are not in OTA, I think that’s very clear.

My point to you though is, is it changing the way that – is it making your life more difficult in acquiring some of the unique deals if some of these guys are maybe being lowered by other players in the space that are getting more aggressive and trying to just pick up everything and anything they can and bidding up for it.

You are not seeing any of that in your – and how you are trying to acquire deals or provide unique opportunities for your member base?.

No, we haven’t seen that and if you listen to what I said over the last few quarters, I’m using more and more the word exclusive. We really position ourselves increasingly as a group and community of members who love to travel. Our members have excellent demographics. The hotel actually love our members.

So we are actually separating ourselves from the crowd by telling the hotels that we can bring them a special group of members that is different from the mass market. So in that respect now we haven’t seen that it becomes more difficult.

If it becomes more difficult to generate special offers, it’s more because of high occupancy rates in certain countries in certain destinations, but that’s always been a trend for Travelzoo over the last 20 years that when travel is very, very good.

It’s more difficult to source deals, but at some point of time members and consumers start learning that it's become more expensive to travel to a certain destination. And then they are responding to the offers again the same way that it few years before..

So that’s a great segue and I appreciate the caller's, a great segue to the next question which is effectively I know we've talked about in the past. We're going to see probably a massive user acceleration because I know that you guys rather spend up to get a higher stickier user with a higher LTV.

Can you just kind of share your thoughts on that balance though and sort of in the marketplace that you're seeing kind of what you think the addressable market is for members that seem to fit.

I don't want to put words in your mouth but it looks like you've created sort of a profile of your member base and there's a certain subset in the travel sector that fits nice and within your membership base that you can that helps you pitch to these hotel.

So can you talk about how much room or headway you think you have universe as your current membership base and where you could get you from a member acquisition perspective with a relation to sort of that higher sticking user that fits that profile..

Our members are most interested in value we about US, but Indian what we found is that our members Indian just they want a good price, but they also equally they wonder really great experience. And I think value seeking consumers it's a very large group out there among consumers.

So I think our addressable market is rather big what probably limited us more in the past is that in order to take advantage of the deals that we have been promoting and product like top 20 have to be very flexible and when you can travel.

So we tend to have members that bit older that maybe retired we have members that are flexible that can travel for example during the middle of the week.

But over the last couple of weeks and now with this new effort in vacations what we are looking to do is provide our members to keep the option to say, okay, well, the best deal is on this and this date, but you can also travel on another date the price might be a little bit big higher but it's still a great value.

So we believe that more members can take advantage of these kinds of offers we haven't done that in the past because the technology is obviously improving and I think that will help us have wide appeal..

And on the tax front you obviously invested a lot of money in the tech stack I think frankly you were the one that spearheaded this when you came back as CEO and it really turned the company around in an efficient fashion from a tech perspective.

You talked again about you know enhancing the mobile experience I'm just curious sort of relative to I know this is always an evolving process but relative to where you'd like to be from a tech perspective.

How comfortable are you with the desktop experience how much more do you need to do on mobile understanding that's where the majority of your traffic continues to come from is the primary growing funnel.

So I just curious where you're at from that perspective? How much more you think you need to invest to get to where you'd like to be?.

Look I think we're not looking to increase all investments in product and technology. Of course we like to improve our productive, but what we're looking to do with it – with the bit smarter and not to do everything ourselves. The company had a history to doing a lot of things, programming, development, coding.

We did everything ourselves and increasingly you are shifting over towards solutions that are provided by third parties. But the world has actually changed now this year becoming 20 years old when we started off in the first 10 years. There wasn't a lot of technology out there that we could leverage.

Now you have fantastic solutions, technology solutions that are in the cloud and we're leveraging this more and more and more.

So over time I actually believe tat expenses is in investments into product in product development and technology will come down, while we're actually improving our products more than we have in the past so that the direction I want to march towards..

Great, that’s helpful.

And just last one for me just on Asia, I know it continues to be a little bit of a headache as you go through the transition period, a little bit of unfortunate luck with the customer, you called out in Japan, which you knew about it, so I just – how is that trending, I guess would be the right way to ask it, have you filled few more positions since last time, how do you feel about the head you've hired? How they performed? Just give us kind of an update there?.

Yes, some markets are actually proving. You don't see it because you the report overall Asia Pacific as a segment, but in some countries actually started to do quite well. We've seen revenue increases that up double-digits. So far Q1 is looking better than 4Q when I look at you over your trends.

So I think we can do with China is probably the country where it’s still looking to establish the right management and the right structure. But I'm confident we will solve it on the other hand markets like Australia, Hong Kong where we put new GMs into place. They are starting to do quite well.

So it really seems related a lot to management, staffing in Asia Pacific not so much that we have pursuing, a strategy that doesn't work..

Got it. All right, well. Thanks for all the color. Appreciate it and congrats on the good quarter..

Thanks. End of Q&A.

Okay, I'll turn back now to Mr. Holger Bartel..

Sure. Ladies and gentlemen, thank you again for your time and support. You of course look forward to speaking with you again next quarter and have a great day..

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect your lines at this time and have a pleasant day..